Providers will be able to buy back annuities from five million Britons holding the products under proposals published by the Treasury today, but they could lose 20 per cent of their value in the process warn experts.
Economic secretary to the Treasury Harriet Baldwin today unveiled the government’s response to the consultation on the secondary annuity market, setting out details of how the market will operate. The document proposes extending the Pension Wise information and guidance service to cover the secondary annuity market, requiring individuals to seek independent financial advice for annuities worth above a certain threshold and asking the independent regulator, the FCA, to put in place a consumer protection framework that could include new risk warnings and ways for consumers to understand the fair value of their annuities.
The government says it will work with the industry and the FCA to create a simple online tool to help consumers work out an estimated value of their annuity.
Hymans Robertson partner Douglas Anderson says the fall in bond yields means an annuity bought five years ago could today still be worth the same amount of money, despite five years of payments, but underwriting and other costs of up to 20 per cent would be likely to offset that gain.
Concerns have also been raised that the government’s response to the consultation on the secondary annuity market fails to promote an open market for flexi-access drawdown for those cashing in their fixed regular income but wanting flexible withdrawals. Fears have been raised that consumers will be signposted to the flexi-access drawdown option of insurers who buy back annuities when this may not be the best value product for them.
Questions have also be raised as to where the threshold for advice should be set and whether advisers will want to engage in advising in this sector of the market.
The government has also moved away from the idea of those on means-tested benefits being excluded from the freedoms, instead relying on existing deliberate deprivation rules to prevent abuse of the system.
Baldwin says: “For most people, sticking with an annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose – the same freedom we gave people approaching retirement in April this year.
People who’ve worked hard and saved hard all their lives should be trusted to make the right decision for them and with the help of the regulator we will ensure these people have the right information to do that.”
Pensions minister Baroness Altmann says: “For the vast majority of customers, selling an annuity will not be the best decision. However, individuals may want to sell an annuity for instance to provide a lump sum for relatives or dependants; in response to a change in circumstances; or to purchase a more flexible pension income product instead.
Anderson says: “Due to historically low bond yields, on the face of it, those trading in annuities could benefit, as investors are willing to pay more for the future cash flows. In the past 5 years, 10-year bond yields have fallen by 2.3 per cent, which has contributed to the increase in the value of annuities.
“This bull market in bonds means that annuitants who bought five years back could get back as much as they put in, despite having drawn an income for those five years, in theory. However, as much as 20 per cent could be wiped off this value due to underwriting and other costs. This is because buyers will require a risk margin to reflect the uncertainty of how long the person will live, so underwriting and administration charges will be deducted – so it may not be as good a deal as it may first seem for the individual.
“The current threshold for advice for DB to DC transfers is a value of £30,000, but this may need to be lower for individual annuities due to the higher ages and mostly level benefits, meaning it is a significantly higher income being given up for a £30,000 value.
“Selling on an existing annuity policy is a bigger deal than deciding not to buy one in the first place. There is a definite advice gap for those approaching or at retirement already, and the failings and low take up of Pensions Wise have been well documented. It’s difficult to see how Pensions Wise can give existing annuitants the support they will need around the decisions they may now be tempted to make.
“The ability to sell on annuities may actually increase the appeal of buying annuities in the first place. Essentially an annuity is an insurance policy against running out of money. In the context of rising life expectancy and the uncertainty around it, individuals need to see it as such.”
Retirement Advantage pensions technical director Andrew Tully says: “It is good to see a compulsory advice safety net being introduced to provide protection and help people from making poor decisions. It remains to be seen if advisers have the appetite to get involved in this business.
“The brokering service will effectively mean everyone will shop around for the best deal. It would be logical to extend this to the primary annuity market.”
AJ Bell chief executive Andy Bell says: “Today’s paper does not seem to address the need to ensure a competitive market for those people wishing to sell their annuity in return for a more flexible pension income product. There is a lot of focus on ensuring people get the best possible cash value from selling their annuity which is important but we’d like to see a requirement for people to have access to the whole flexi-access drawdown market if that is the option they select.
“If the flexi-access drawdown options of consumers selling their annuity are restricted, we will potentially end up in a position where consumers are suffering from failings equivalent to those that the second hand annuity market is trying to address, where many individuals were defaulted into a poorer value annuity than might have been available to them.
“In the spirit of extending choice and flexibility of the pension freedoms to annuity holders, anyone selling their annuity in order to create a more flexible income should be able to benefit from a free choice of all flexi-access drawdown providers.“
